The new round of health care reforms in China achieved significant initial results. New and emerging problems coinciding with the deepening of the reforms, however, require further institutional changes to strengthen the competition mechanism and promote public hospital efficiency. This paper provides a conceptual framework and preliminary assessment of public hospital competition in China. Specifically, we distinguish between two closely related concepts – competition and privatization, and identify several critical conditions under which hospital competition can be used as a policy instrument to improve health care delivery in China. We also investigate the current performance and identify several unintended consequences of public hospital competition – mainly, medical arms race, drug over-prescription and the erosion of a trusting relationship between patients and physicians. Finally, we discuss the policy options for enhancing the internal competition in China’s hospital market, and conclude that public investment on information provision is key to reaping the positive outcomes of pro-competition policies.